What Is Contract Costing ?
Some firms such as builders, construction contractors, civil engineering firms, construction and mechanical engineering firms are engaged in construction works such as construction of buildings, bridges, roads and so on. A firm engaged in the construction works requires to know the total cost of the construction work done. The total costs of the work help to find out the profit earned from these works. The cost information about construction works helps to monitor and evaluate the performance of contract work and to determine the total contract cost. Such information is provided by a costing method known as contract costing.
Some firms such as builders, construction contractors, civil engineering firms, construction and mechanical engineering firms are engaged in construction works such as construction of buildings, bridges, roads and so on. A firm engaged in the construction works requires to know the total cost of the construction work done. The total costs of the work help to find out the profit earned from these works. The cost information about construction works helps to monitor and evaluate the performance of contract work and to determine the total contract cost. Such information is provided by a costing method known as contract costing.
Contract costing is the costing method applied to determine the cost of construction work performed as per a customer's specification. Contract costing is also called terminal costing as it terminates with the discharge of contract work. The construction work is undertaken at the site allotted by the client. The contract sites vary and are always outside the premises belonging to the clients. A separate code number is allotted to each site where a number of contract works are undertaken. A contract account is maintained for each contract work to record the contract costs under contract costing. Maintaining a contract account helps to find out the amount of profit earned during a particular period since financial books do not report it separately. Normally, a contract account is prepared at every year-end to determine the profit for the specified period.